As editor of Elliott Wave International's Prime Stocks Flash service, Ron Feinstein's job is to find opportunities among individual U.S. stocks using Elliott wave analysis. To find out how he does it, I sat down with Ron to pick his brain.
Vadim Pokhlebkin: Ron, for starters, which markets do you follow to find tradable opportunities?
Ron Feinstein: Any U.S-traded stock with sufficient liquidity and volume is fair game. I monitor over fifty stocks daily, looking for the most attractive risk/reward profiles. Once I find one, I issue a long or a short Flash alert to subscribers. (Sometimes we do have to be careful on short Flash alerts, as there may not be stock available to borrow.) Ideally, each scenario lasts beyond just a few days.
VP: I once heard you describe your trading philosophy as "buying the dips in rising markets and selling rallies in falling markets." In other words, you try and go with the trend rather than fight it -- but how do you know what the trend is?
RF: There are several ways to define a trend. I have always been a big fan of keeping things simple, so when I look at price charts, I go with the higher highs and higher lows to identify an uptrend, and lower highs/lower lows in a downtrend. I also find it important to watch some technical indicators, like momentum divergences. While the approach of buying dips in uptrends and selling rallies in down trends sounds simple enough, in Prime Stocks Flash, I try to put together multiple time frames to hone in on the suggested entries.
VP: Can we look at an example -- maybe a chart of a stock recently featured as a Flash alert?
RF: Here is a recent Flash alert for Burlington Northern (NYSE: BNI).
Looking at the rally from the March low, it's clear that the daily trend is up. Yet as I said, I do look at each stock on multiple time frames, so my assumption for the long-term trend was that it was still down. Here's why: Off the low, price rallied almost exactly to the 38% retracement of the previous down wave, a very common Fibonacci-derived price target. Also, an Elliott wave guideline of alternation -- which states that if wave 2 is deep and fast, then wave 4 is likely to be shallow and protracted, and vice versa -- was satisfied. And while it's hard to see on this chart, at the high the rally was showing momentum divergence. Finally, the intraday wave patterns also supported at least a short-term top. All that evidence helped me to determine that the risk/reward was favorable, and issue a "sell" Flash alert.
VP: You're making it sound like you weren't quite sure if the market would fall or not.
RF: Well, you can never be sure in this business. The best you can do is gauge the odds. Yes, after the fact most Elliott wave counts become evident, but trying to get a handle on them in real time is rarely a clear-cut case; at least some ambiguity will always be there. What you do is look at the evidence, to see if the probabilities are in your favor. Then you can act.
There are good trades and bad ones, but what determines that is not necessarily their outcome. If you pull the trigger on a trade willy-nilly, after getting a tip from a buddy, for example -- without having enough evidence, without figuring out a good risk-reward ratio, without knowing when to get out -- that's a bad trade. Even if you happen to earn a profit, you just got lucky. To me, a good trade is not necessarily a successful one. If nine out of ten of my indicators are telling me to act, the odds are stacked in my favor high, and that's a good trade, regardless of the outcome. Although, most of the time, if you've done your research right, the market will reward you. That's really the approach I take in my service.
VP: Thank you for taking the time to explain your philosophy, Ron.
RF: My pleasure.